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A Bottom Up Look at the Top Down

    For a conservative non-economist, reading that IPPR has responded to Ryan Bourne and Thomas Oechsle’s report Small Is Best with the claim that small’s not best is the occasion for little more than a sigh. In the U.S., William Voegeli has had a big success with his book Never Enough: America’s Limitless Welfare State, and the implied question in his title is always mine.

    To wit: if you believe that it is not possible to demonstrate that any particular level of taxation, welfare spending, or redistributive policies are economically counter-productive, and if you are in principle in favor of these things, then when do you say “enough,” and why do you decide to say it?  A reliable way to get liberals excited is to say that they’re socialists. Fine, they’re not. But if Britain – where the government currently spends 50 percent of the nation’s GDP – is not verifiably well past the point of diminishing returns on state spending, where does that point lie? Is it 60 percent? 70 percent? 99 percent? If neither evidence nor principle tells you when to stop – and to go into reverse – then what does? At what point does the distinction between a really big government and socialism become irrelevant?

    Steve Hayward has been making this point energetically on Powerline – which deserves to be familiar to readers in Britain, if it’s not already. And the response of American liberals, which is that the limits to what they will ask for at any given moment are defined by politics, is no answer at all. It comes down to the claim that liberalism is what you can get away with. Liberals don’t like big government because it’s verifiably better. Evidence doesn’t enter into it. This is religion.

    Ryan and Thomas have gone at this question from the top down, i.e. they’ve looked at a large sample of nations over an extended period through a regression analysis. But it’s also fun to look at how stimulus programs work from the bottom up – i.e. how much each ‘stimulus job’ costs – and happily, we have recent examples from both sides of the Atlantic. In the U.S., the White House Council of Economic Advisers has found that, as of last December, the cost of each job supposed ‘saved or created’ by the stimulus bill has risen to $317,000. And that’s the estimate by the President’s own economists! Assuming that these jobs exist, and that they pay the U.S. average wage of about $40,000, you have to assume a Keynesian multiplier of eight to make the stimulus get to the break even point. No one, not even liberals, thinks the multiplier is anywhere near that size.

    In Britain, we’ve got the April 2012 report from the National Audit Office on “The Regional Growth Fund.” The basic premise of the Fund is, as the head of the Office declared, that it would “support growth and jobs in areas that rely on the public sector,” i.e. everywhere but London. (It’s a sign of just how big that sector is in Britain is that such a program doesn’t spend money in the capitol city. You’d think that it would be London, above all, that would rely on public sector jobs.) The idea behind the Fund is not easy to understand: how, exactly, does a government grant program do anything other than encourage jobs that rely on the public sector? And Britain has a long history of trying to use public money to encourage job growth in the marginal constituencies – pardon me, the depressed areas – and all of these programs have one thing in common: they have been relentless failures.  But try, try again.

    Or maybe not. The NAO found that, after the Fund spends 1.4 billion pounds, it expects to create 41,000 jobs. That is undoubtedly the very best case scenario, because the NAO has made no effort to assess whether jobs have actually been created, and only 13,000 of those jobs are (supposedly) going to be a direct result of the Fund: the other 28,000 rely on assumptions about knock-on effects. The number of knock-on jobs to be created derives from the applicants to the Fund, who were “asked to estimate how many of these indirect jobs they thought their projects would support.” That sounds like a nice, objective way to decide out how to hand out the public’s money: ask the applicants how successful at spending it they think they will be. As the NAO dryly notes, “Verifying the precise number of indirect jobs that have been delivered will however be difficult.”

    Moreover, almost all of the Fund’s spending is nothing more than loaning or giving money to banks or businesses: in other words, it’s a financing operation. Given that the Bank of England’s base rate is at historic lows, it’s hard to make the case that the problem in Britain today is good businesses going begging for money. The problem is not a lack of lenders: it’s a lack of creditworthy and ambitious borrowers who see a way to turn a profit on a loan. That in turn suggests that estimates of how well the Fund is likely to do in promoting employment are going to err very much on the high side. And then there’s the fundamental problem; in Britain, as in the U.S., analyses of stimulus spending assume that the money is free. It’s not: it was either taxed away or borrowed from someone. In other words, it was first taken out of the productive economy, and then inefficiently shoveled back into a less productive part of it.

    Figure 8 in the NAO report suggests just what kind of inefficiency we’re talking about here.  Most of the jobs supposedly ‘saved or created’ by the Fund are the result of a relatively few projects. As the NAO points out “over 90 percent of the net jobs expected from the full £1.4 billion could have been secured for around £1 billion.” The first round of the Fund awards were a lot more efficient than the second round, and the first few awards within each round were vastly more efficient than the rest of it. (Much the same is true in the U.S., where the price of each stimulus job ‘saved or created’ has climbed relentlessly.) Even if you ignore all the other problems, the clear implication of the NAO study is that government spending can’t dig up many jobs that the private sector hasn’t located, and that efforts to keep on digging only create an expensive hole. That’s one reason, though far from the only one, why small is indeed best.

     

    Dr. Ted R. Bromund is the Margaret Thatcher Senior Research Fellow in the Margaret Thatcher Center for Freedom in the Heritage Foundation in Washington, DC. He joined Heritage in 2008 after a decade as the Associate Director of International Security Studies at Yale University, a research and teaching centre dedicated to diplomatic, military and strategic history, and grand strategy.

    Dr. Ted R. Bromund is the Margaret Thatcher Senior Research Fellow in the Margaret Thatcher Center for Freedom in the Heritage Foundation in Washington, DC. He joined Heritage in 2008 after a decade as the Associate Director of International Security Studies at Yale University, a research and teaching center dedicated to diplomatic, military and strategic history, and grand strategy.

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